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The 2006 Asian Roundtable on Corporate Governance Implementation and Enforcement of Corporate Governance Rules Lawrence Liu Executive Vice President and.

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Presentation on theme: "The 2006 Asian Roundtable on Corporate Governance Implementation and Enforcement of Corporate Governance Rules Lawrence Liu Executive Vice President and."— Presentation transcript:

1 The 2006 Asian Roundtable on Corporate Governance Implementation and Enforcement of Corporate Governance Rules Lawrence Liu Executive Vice President and Chief Strategies Officer, China Development Financial Holding Corporation Chinese Taipei Day 1 – Part III Procomp : A Case in Chinese Taipei Bangkok, Thailand September 2006

2 2006 ARCG 1 Contents  Background  " Facts " of Procomp Case  Legal Liabilities of Procomp Case  Enforcement of Procomp Case  Securities and Futures Investors Protection Center  Procomp’s Impact on Corporate Governance  Appendix

3 2006 ARCG 2 Background - 1  Timing  High-tech industry boom in the 90s and electronics stocks reigned  Post-crisis " landmine" cases in traditional sectors in Chinese Taipei  Regulations inadequate No Investors Protection Act and information disclosure limited  Enron case occurred in 2001

4 2006 ARCG 3 Background - 2  Procomop Case  12/2003:material downward adjustment in its financial forecast  6/2004:applied for reorganization after defaulting on NT$3.07 billion (US$96mm) DCB  2H/2004:Other High-Tech " landmine " cases : such as Infodisc Technology, Summit Computer Technology, etc. Company name Event time Wrongful activity Date on which SFIPC filed civil suit No. of plaintiffs Claims (in NT$ mm/US$ mm) Procomp06/2004 Misrepresentations in financial statements Misrepresentations prospectus 11/200410,0565,825 ($182) Infodisc Tech.09/2004 Misrepresentations in financial statements Insider Trading 09/200510,4983,050 ($95) Summit Computer Tech. 09/2004Misrepresentations in financial statements02/20061, ($11)

5 2006 ARCG 4 " Facts " of Procomp Case - 1  The Company  Products : Motherboards, IA products, semiconductor such as GaAs EPI-wafers  Chairperson : Ms. Sophie Yeh Her husband :" Financial Iacocca in Chinese Taipei" Mr. Walter Lin, former Chairman of Waterland Financial Holdings  12/1999 : IPO with price of NT$85.5 (US$2.7)/share (P/E=28) The highest trading price : NT$368 (US$11.5)/share (P/E=82)  In 2000 & 2001 : Made NT$5.9 billion (US$188 mm) cash injection  In 2001 : Issued NT$ 3.5 billion (US$109 mm) DCB  In 2003 : Issued NT$1.7 billion (US$50 mm) OCB  Totally raised NT$ 11.1 billion (US$ 347mm) funds from capital markets

6 2006 ARCG 5 " Facts " of Procomp Case - 2  Trick I – 1.1  Repeated fabricated sales cycle Procomp Domestic Co- conspirators / Suppliers ‧ A ‧ E ‧ B ‧ F ‧ C ‧ G ‧ D Buyers ( Dummy companies in HK. Representative was Procomp’s Employee) ‧ Marksman ‧ Emperor ‧ Farstream ‧ Kingdom ‧ Fasson False Sales Repacked and exported commodities Sold back to Procomp

7 2006 ARCG 6 " Facts " of Procomp Case - 3  Trick I – 1.2  Fabricated deals to window dress financial statements Created NT$16 billion (US$504mm) fabricated A/R and NT$5.6 billion (US$175mm) fabricated A/P Procomp Domestic Co- conspirators / Suppliers ‧ Partial funds were paid for related import declaration tax and as rewards to suppliers Buyers (Dummy companies in HK. Representative was Procomp’s Employee) ‧ Partial funds were diverted by Sophie Yeh and disappeared without a trace Payment for goods Remaining funds remitted to Dummy Companies in HK Payment for goods

8 2006 ARCG 7 ‧ Authorized Metropolitan Bank & Trust Company to buy US$ 85mm CLN issued by SGA " Facts " of Procomp Case - 4  Trick II –  US$85mm Fabricated Deposit with Metropolitan Bank & Trust Company Procopm Deposit contract / buy CLN Metropolitan Bank & Trust Company ‧ Using fabricated sales cycle to transfer funds to dummy companies in HK ‧ Dummy companies in HK deposit US$ 85mm in Procomp’s account at Metropolitan Bank & Trust Company as partial payments for goods

9 2006 ARCG 8 ‧ Authorized Metropolitan Bank & Trust Company to buy US$ 85mm CLN with credit link to North Asia Financial Company issued by SGA. The CLN was put under Metropolitan Bank & Trust Company’s custody ‧ The North Asia Financial Company borrowed US$ 85mm from SGA " Facts " of Procomp Case - 5  Trick II –  US$85mm deposit evaporated  Money went to dummy company ‧ Procomp announced reorganization proposal. Metropolitan Bank & Trust Company transferred CLN to Procomp and terminated the deposit contract with Procomp Metropolitan Bank & Trust Company SGA HK branch North Asia Financial Company (Dummy company in BVI. Representative was Procomp’s Employee) Procomp buy CLN Metropolitan Bank & Trust Company Credit Link Note CLN$ $

10 2006 ARCG 9 " Facts " of Procomp Case - 6  Trick II – 2.2  US$45mm Fabricated Deposit in Australian Commonwealth Bank  After Procomp announced reorganization proposal, US$45mm deposit was offset by the zero-coupon bond Procomp 1. Sold account receivables (A/R) Commonwealth Bank CTB ( subsidiary of Commonwealth Bank) AIM Global Finance Ltd. (Dummy company in BVI. Controlled by Sophie Yeh) 2. Payment of A/R were remitted to Procomp (Booking as deposit) 3. Sold A/R 4. Procomp’s deposit was used to buy zero-coupon bond issued by AIM based on A/R

11 2006 ARCG 10 " Facts " of Procomp Case - 7  Trick III  US$50mm Fabricated Deposit in Rabobank and Metropolitan Bank  After Procomp announced reorganization proposal, US$50mm deposit was offset by loans  Dummy companies earned capital gains from the stock market Procomp 1. Set up dummy companies Best Focus Assets Ltd. Fernvale Assets Ltd. (Dummy companies in BVI. Controlled by Sophie Yeh’s friends) Rabobank Singapore Branch Metropolitan Bank & Trust Company 2. Borrowed US$ 50mm 5. Procomp announced stock buyback plan. When the stock rallied, dummy companies converted all the OCB into stocks to earn capital gains 3. Dummy companies acquired all the OCB issued by Procomp 4. Abide by agreement, deposit all OCD proceeds to banks Underwriter is the HK subsidiary of a financial institution in Chinese Taipei

12 2006 ARCG 11 " Facts " of Procomp Case - 8  Trick IV  Guaranteed dummy companies to transfer cash US$10 mm  After Procomp announced reorganization proposal, US$10mm deposit was offset by loan. Money went to dummy company  From Trick II–IV, about NT$ 6 billion (US$190 mm) deposit evaporated after Procomp announced reorganization proposal Procomp 1. Deposited US$10 million Addie (Dummy company in BVI. Representative was Procomp’s Employee) Bank under a financial holding corp. 2. Lent to Addie US$10 million 3. Deposits as guarantee for Addie’s borrowing Grand Capital (Overseas subsidiary of the same financial holding corp.)

13 2006 ARCG 12 Legal Liabilities of Procomp Case  Directors/Supervisors and Employees  Misrepresentations in financial statements  Misappropriation of company assets  Making of false statements on the application materials  Accounting Firms/CPA (KPMG and Deloitte Touche Tohmatsu)  Omission in the certification  Underwriters (Yuanta 、 Fubon 、 Hua Nan 、 TIS)  Misrepresentations in underwriting report

14 2006 ARCG 13 Enforcement of Procomp Case-1  Investigation and Enforcement  7/2004 : Financial Supervisory Commission immediately began investigations  10/2004 : Prosecutors brought charges against 31 related company officials  6/2005 :Walter Lin forced out from the chairmanship of Waterland Financial holdings for NT$1.95 billion (US$61mm) abnormal inflows from his wife  12/2005 : Sophie Yeh was sentenced to a 14-year prison term and NT$180 million (US$5.6mm) criminal fine  5/2006 : Prosecutors petitioned for appeal, seeking a 20-year prison term and NT$ 500 million (US$16 mm) criminal fine

15 2006 ARCG 14 Enforcement of Procomp Case-2  Liabilities of CPAs and Underwriters  CPAs : suspension from practice for 6 months  Underwriters : received warnings  Investors’ Protection  The Securities and Futures Investors Protection Center (SFIPC) representing 10,056 investors and asked for NT$5.8 billion (US$181mm) compensation  Managers, board directors and supervisors, accounting firms/accountants and underwriters are also defendants in these lawsuits  Settled with 4 underwriters for NT$78.1 million (US$2.4mm)  Settled with 2 accounting Firms for about NT$90 million (US$2.8mm)

16 2006 ARCG 15 Securities and Futures Investors Protection Center  Established in accordance with the Protection Act in 2003  Handles consultation, mediation, investor complaints, files class-action lawsuits  Currently has 41 cases for securities fraud Representing over 57,000 investors Claiming for NT$ 23.6 billion (US$738 m) compensation  The largest case : the Pacific Electric Wire & Cable case  more than 25,000 investors  seeking over NT$8 billion (US$250m) in damages

17 2006 ARCG 16 Procomp’s Impact on Corporate Governance - 1  The SFIPC became an important enforcement arm of government  CPA and underwriter liabilities and deterrence increased  Increased damages  fewer IPOs, more SPOs  The information disclosure on IPO & SPO enhanced  Financial forecast mechanism changed to voluntary in 2005  Key modifications of Company Law  Shares held by subsidiaries have no voting rights  1% shareholders to make shareholders proposals in AGM

18 2006 ARCG 17 Procomp’s Impact on Corporate Governance - 2  Key modifications of Securities and Exchange Law  Independent board directors / audit committees  Integrity and honesty for company representative  Damage compensation Issuers and their responsible persons : strict liability Employees & CPAs : proportionate liability  Close relatives may not constitute half of the boards  Juristic persons may not be selected as the director and supervisor at the same time  Enhanced penalties

19 2006 ARCG 18 Appendix

20 2006 ARCG 19 Ongoing cases of Class-Action Litigation or Arbitration-1

21 2006 ARCG 20 Ongoing cases of Class-Action Litigation or Arbitration-2

22 2006 ARCG 21 Ongoing cases of Class-Action Litigation or Arbitration-3

23 2006 ARCG 22 Ongoing cases of Class-Action Litigation or Arbitration-4


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